After two defiant quarterly result calls, sticking to the plan, Q3’s call was different. Evan, for the first time since Snap went public, acknowledged it was time for drastic changes. Achieving user growth by a UI Redesign, a new Android app and modifying the feed are all in the works.

Some want to take the course change as a sign that Evan doesn’t know what he’s doing. That Snap has grown beyond Evan’s abilities. I’m taking the other take. This shows Evan isn’t stubborn and changes when the time calls for it.

I have concerns that Evan is buckling to pressure. Is Evan worried about appeasing Wall Street in the short term? Has he seen enough data to come to his own conclusion about Snap’s growth potential? That’s the question.

Data Crunching

At 178mm users using Snapchat over 30 minutes a day, Snap is a wildly popular product. But with a $15b market cap, Snap needs more than 178mm users to eventually hit a reasonable P/E.

Snap Modeling

Snap’s main financial levers are DAUs, ARPU, Cost of Revenue and Operating Expenses. DAU x ARPU gives us total revenue. Snap must increase DAU and ARPU at a rate higher than Cost of Revenue and Operating Expenses to become profitable. In the model above I’ve assumed a DAU q/q growth at 3%, ARPU growth at 15% while maintaining a 3% growth on Cost of Revenue and a 2% growth on Operating Expenses. That gives Snap healthy cash flow by the end of 2019 but its path to get there is uncertain and is not quick enough for Wall Street to tolerate.

There are chances Snap can hit profitability with modest user growth if Snap is able to greatly increase ARPU. With another large investment from Tencent, parent company of WeChat, Snap has access to a wealth of Tencent experience to help further monetize their base.

The Changes

Evan has stated Snap’s priorities in 2017 have been performance, quality, and automation. Android performance has improved but not as much as Snap was hoping for. On the quality front, Snap has invested in a device testing lab that should bear fruit in the future. On an Automation front, Snap has made huge strides moving its ad business to self-serve. For a company going public with the need to automate, these three priorities made sense for 2017.

The three new priorities for 2018 are user growth, content, and augmented reality. As seen above, unless there is out sized ARPU growth, more user growth is necessary to hit profitability.

User Growth

Redesigning the UI

Last month I defended Snapchat’s UX, pointing out that an intuitive UI is not the be all end all. I stand by the post but understand why Evan and Snap may have to migrate to a more intuitive UI. Snap continues to kill it in the 18-34 age group but has room to grow with other demographics. Evan seemed to wanted to stick with what got Snap this far and not dumb down the UI but the user growth stagnation seems to have changed his mind. This move is risky, how many current users will be alienated and defect?

Facebook and the algorithmic newsfeed, Twitter with an algorithmic newsfeed (and 280 characters). Keep in mind many before Snap have made drastic changes to the core UX and continued to grow.

Android app

The Android fragmentation is giving a company like Snap a run for their money. Snap likes to push the envelope with what a mobile device can do with Snapchat and this strategy has many risks. A rewrite is a costly, risky but with global domination in mind, having a rock solid android app is Snap’s only hope. This bet reminds me of Facebook’s first mobile stumble when they bet too much on HTML5 and had to rewrite their app with more native components. Although risky, this move at this stage appears to be the only hope.

The Feed

Evan wasn’t specific about the changes to come but what he did say showed an astute understanding of Snap’s users.

I think there’s a really exciting opportunity here for another evolution of that content feed that addresses some of the shortcomings of the friend-based content feed model.

So, for example, in a friend-based content feed, in order to get more content in that feed, you need more friends. When people start adding more friends, they then feel less comfortable posting content and so they start posting less. That means that you need even more friends to get more content. So you end up in this kind of precarious situation where because you base the content feed on what friends are posting, you sort of are inherently limited in how you grow that selection of content. Ultimately, what we found is that the best predictor of what people are interested in and want to watch is actually what they’re watching. I think there’s an opportunity here for us to create a really great personalized content service that doesn’t at all diminish the great and, I think, very differentiated communications business that we’ve established.

I’m a big fan of companies having a unique identity and Evan highlights a unique position Snap has with its users. Snap continues to be a place where friends share themselves more authentically with others than on Instagram or Facebook. This is why some will gravitate to Snap even if Instagram had the some features. How can Snapchat grow its user base and engagement while avoiding the “posting less” phenomena? I can’t wait to see what Evan has up his sleeve.

The Bottom line

Snap has not concentrated on “User Growth” as a priority in 2017. Snap is no longer growing the user base at a rapid pace organically and its long-term business prospects do not look as high as they once did. Does this mean Snap is done for? No, not in the slightest. Snap has made user growth a priority, identified areas which has impeded user growth and is actively working to improve these areas. Evan has evolved Snap before and will do it again.